By virtue of ratification, the acts of the board of directors become the acts of the stockholders themselves, even if those acts were, at the outset, unauthorized.
G.R. No. 154291, 12 November 2014
Lopez Realty, Inc. (LRI) and Asuncion Lopez-Gonzalez initiated a “Complaint for annulment of sale, cancellation of title, reconveyance and damages with prayer for the issuance of temporary restraining order (TRO) and/or writ of preliminary injunction against the spouses Tanjangco, Arturo and the Registrar of Deeds of Manila.”
Previously, LRI and Dr. Jose Tanjangco (Jose) “were the registered co-owners of three parcels of land and the building erected thereon known as the ‘Trade Center Building’… Jose’s one-half share in the subject properties were later transferred and registered in the name of his son Reynaldo Tanjangco and daughter-in-law, Maria Luisa Arguelles (spouses Tanjangco).”
These were the stockholders of record of LRI at the time material to this case:
- Asuncion Lopez-Gonzalez (Asuncion, Director & Corporate Secretary) – 7,831 shares;
- Arturo F. Lopez (Arturo) – 7,830 shares;
- Teresita Lopez-Marquez (Teresita) – 7,830 shares;
- Rosendo de Leon (Rosendo, Director) – 5 shares
- Benjamin Bernardino (Benjamin, Director) – 1 share;
- Augusto de Leon (Augusto, Director) – 1 share; and
- Leo Rivera (Leo, Director) – 1 share
During a special stockholders’ meeting held on 27 July 1981, the sale of 1/2 share of LRI in the Trade Center Building was taken up. While the selling price was at P4 M, the Tanjancos offered P3.8 M. To this, Asuncion countered with P5 M which was not accepted by the Tanjancos. Thus, the board agreed to give Asuncion the priority to equal the Tanjanco offer and the same to be exercised within ten (10) days. Otherwise, the Tanjanco offer will be deemed accepted. Just a day after, Teresita died (her estate’s executor Juanito L. Santos represented her afterwards).
As Asuncion failed to exercise her option to purchase the subject properties, and while she was abroad, “the remaining directors: Rosendo, Benjamin and Leo convened in a special meeting” passing and approving the 17 August 1981 Resolution authorizing Arturo to negotiate and “carry out the complete termination of the sale terms and conditions as embodied in the Resolution of July 27, 1981”, among others. Subsequently, the sale was perfected with payments subsequently made.
After learning of the sale, Asuncion filed this complaint challenging the validity of the 17 August 1982 Resolution on the ground that she was not notified of the meeting.
HELD: The sale was valid. The 17 August 1981 Board Resolution did not give Arturo the authority to act as LRI’s representative in the sale “as the meeting of the board of directors where such was passed was conducted without giving any notice to Asuncion.” This is in violation of Section 53 of the Corporation Code which requires sending of notices for regular or special meetings to every director.
As a result, “a meeting of the board of directors is legally infirm if there is failure to comply with the requirements or formalities of the law or the corporation’s by laws and any action taken on such meeting may be challenged as a consequence.”
Notwithstanding, “the actions taken in such a meeting by the directors or trustees may be ratified expressly or impliedly.” In the case of ratification, it means that “the principal voluntarily adopts, confirms and gives sanction to some unauthorized act of its agent on its behalf.”
Here, “the ratification was expressed through the July 30, 1982 Board Resolution.” Regarding Asuncion’s claims that the 30 July 1982 Board Resolution did not ratify the 17 August 1981 Resolution due to Juanito’s disqualification and Leo’s negative vote. “Asuncion assails the authority of Juanito to vote because he was not a director and he did not own any share of stock which would qualify him to be one. On the contrary, Juanito defends his right to vote as the representative of Teresita’s estate. Upon examination of the July 30, 1982 minutes of the meeting, it can be deduced that the meeting is a joint stockholders and directors’ meeting. The Court takes into account that majority of the board of directors except for Asuncion, had already approved of the sale to the spouses Tanjangco prior to this meeting. As a consequence, the power to ratify the previous resolutions and actions of the board of directors in this case lies in the stockholders, not in the board of directors. It would be absurd to require the board of directors to ratify their own acts—acts which the same director s already approved of beforehand. Hence, Juanito, as the administrator of Teresita’s estate even though not a director, is entitled to vote on behalf of Teresita’s estate as the administrator thereof.”
Citing jurisprudence, in stock corporations, “shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.”
As there exists no corporate secretary’s certification of the minutes of the meeting, “only Juanito, Benjamin and Roseno, whose signature appeared on the minutes, could be considered as to have ratified the sale to the spouses Tanjangco.” As Leo owns only 1 share, the results are the same against the overwhelming shares who voted in favor of ratification.
“In sum, whatever defect there was on the sale to the spouses Tanjangco pursuant to the August 17, 1981 Board Resolution, the same was cured through its ratification in the July 30, 1982 Board Resolution. It is of no moment whether Arturo was authorized to merely negotiate or to enter into a contract of sale on behalf of LRI as all his actions in connection to the sale were expressly ratified by the stockholders holding 67% of the outstanding capital stock.”
Citing jurisprudence, “the Court held that by virtue of ratification, the acts of the board of directors become the acts of the stockholders themselves, even if those acts were, at the outset, unauthorized.”